EMCOR (EME) Posts Record Q1 Earnings, Beats On Revenues

EMCOR Group Inc. (NYSE:EME) posted its fifth consecutive earnings beat, as first-quarter 2018 adjusted earnings from continuing operations came in at a record 94 cents per share. The figure trumped the Zacks Consensus Estimate of 85 cents by 10.6%.

The earnings figure improved 6.8% year over year, driven by higher productivity and improved margins. Solid non-residential construction demand and strong project execution boosted profits.

Inside the Headlines

The company generated a record $1.9 billion in revenues, which edged up 0.5% year over year and surpassed the Zacks Consensus Estimate of $1,816 million.

Revenues in the quarter were primarily fueled by sound performance from the combined U.S. Construction and U.S. Building segments, along with solid contribution from recent acquisitions.

Coming back to the quarter under review, the U.S. Construction segment (up 3.5% year over year) sustained its robust momentum and delivered strong revenues as well as operating income growth. The segment was driven by the U.S. Mechanical Construction business (up 2.6%). The U.S. Electrical Construction business rose 4.1% year over year.

The company’s U.S. Building Services segment revenues inched up 3.3% year over year,driven by strong execution in commercial site-based and energy services businesses.

The U.S. Industrial Services revenues, affected by the lingering impact of Hurricane Harvey, continued to exhibit a lackluster performance and contracted 28.4% year over year. The hurricane led to a delay in the fall turnaround work and under absorption of overhead costs for projects which the company was unable to execute, which dented margins.

Revenues from total U.S. operations fell 1.1% year over year to $1,793.5 million. Revenue growth from the U.K. building services continued on growth trajectory and grew 35% year over year to $106.9 million. The upside was driven by profitable new contracts, solid execution in base business and increased project activity.

As of Mar 31, 2018, EMCOR’s backlog was $3.98 billion, down 0.5% year over year.

A rise in the backlog of the U.S. Building Services, U.S. Industrial Services, and U.K. Building Services segments more than offset the dip in backlog for the U.S. Mechanical Construction and U.S. Electrical Construction.

From an end-market perspective, the company witnessed growth in backlog for the commercial and water & wastewater markets, offset by declines in industrial, healthcare and transportation sectors.

EMCOR’s operating income was $78.7 million, down 5% from the prior-year quarter. Operating margins were 4.1%, reflecting a contraction of 30 basis points from the prior-year quarter.

EMCOR Group, Inc. Price, Consensus and EPS Surprise

Liquidity & Cash Flow

EMCOR’s cash and cash equivalents totaled $352.4 million as of Mar 31, 2018, compared with $467.4 million as of Dec 31, 2017. Total debt and capital lease obligations were $266.5 million, down from $269.8 million recorded on Dec 31, 2017.

For the quarter, cash flow used in operating activities totaled $143.4 million, significantly higher than $72.7 million recorded in the year-ago quarter.

Guidance

On the back of its accretive acquisitions and solid traction in the U.S. construction space, EMCOR’s management reiterated guidance for 2018, with earnings from continuing operations in the range of $4.10-$4.70.

In light of the current size and mix of its backlog and overall positive market conditions, EMCOR expects revenues in the range of $7.6-$7.7 billion.

Our Take

EMCOR started 2018 on a strong note, as the company set fresh records for net income and outdid revenue expectations as well. Strong performance in the non-residential construction segment has set the tone for robust future growth, reflected in the company’s healthy backlog and 2018 guidance.

Also, a healthy balance sheet position and increasing market traction added to the company’s strength, indicating bright prospects. Additionally, increasing strength in the non-residential construction markets bodes well for the company. Building Services is expected to gain from sustained growth in the retrofit and energy-savings projects.

Meanwhile, the company witnesses persistent headwinds in its U.S. Industrial Services segment, which is likely to be affected by adverse “new build” heat exchanger fabrication pricing.

We believe that the Zacks Rank #1 (Strong Buy) company’s diverse business structure along with efforts to explore beyond-traditional shop-related operations for tapping other profitable areas like food processing and power will drive long-term growth.

Other Stocks to Consider

A few other top-ranked stocks in the broader construction sector include KB Home (NYSE:KBH) , Primoris Services Corporation (NASDAQ:PRIM) and TRI Pointe Group, Inc. (NYSE:TPH) . While KB Home sports a Zacks Rank #1, Primoris and TRI Pointe carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home registered a positive average surprise of 19.5% in the four trailing quarters, beating estimates all through.

Primoris registered a remarkable positive average surprise of 10.7% in the last four quarters, driven by three consecutive beats.

TRI Pointe has a decent earnings beat history, beating estimates each time in the trailing four quarters with an average beat of 9.4%.

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